Back in 2008 I remember getting a visit from a broker who was trying to convince me to get on board with a unitised fine wine fund, which was just about to be launched.

Back-testing had shown a steady return of around 8% per annum for the previous ten years (so he claimed) and the lovely big glossy brochure painted a rosé picture (pardon the pun) of possible future returns.

Nonetheless, I declined the opportunity to sell this wonderful fund (which I seem to recall folded only a few years after launch – maybe they drank all the wine!).

Although there was little doubt in my mind that a unitised fund was not really appropriate, this doesn’t mean that wine cannot (or is that “should not”?) be collectable as an investment. In fact, in my time I’ve come across several collectors/investors who have passed on some of their wine investment wisdom to me – usually over a glass of wine.

First, a confession

I collect wine, but here’s the deal… in my house all wine is to be drunk at some point, so I feel that I can give you an unbiased view. Whilst I collect wine, I refuse to re-sell it and I will drink it – eventually.

OK, now that that admission is out of the way, let’s talk wine as an investment.

Firstly, it’s not a new phenomenon, wine drinkers and collectors have been buying wine to pass on at a profit for centuries. However, since the mid 1990’s it become truly global in its market size.

Some basics

• Know your wines – ok, you might think this is obvious, but as I keep banging on, if you’re going to invest in anything, take the time to understand the product. People who invest in things which they know nothing about are gamblers, not investors.
• Get yourself a merchant – seriously, there are some wonderful wine merchants in the UK who can give you advice on which bottles to purchase, and more to the point, at the right price. An example is Berry Bros. & Rudd of London who have been trading for over 300 years.
• Storage – you need a cellar/room/garage. A wine rack in the kitchen isn’t going to cut it. Some merchants do offer a storage facility where they will do it for you, at a price of course.
• Fine wines only – as a rule of thumb, only invest in the top wines of Bordeaux and a handful of wines from Burgundy. Whilst other parts of the world make great wines, the global secondary market has limited demand for these, so sticking to the best from Bordeaux is realistically the safest strategy.
  OK those are the basics, now ….

The advantages

• Finite supply – fine wine matures once bottled and improves with age. A limited amount is produced every year and, when bottles are consumed, the supply of the wine becomes smaller. As supply diminishes over time, demand generally rises as the wine matures. Thus, we have in theory a perfect market equilibrium.
• Non-correlated – basically the stock market can be burning to the ground and it won’t make any difference to the price of your wine – unless they’re using it to douse the flames.
• Tangible asset – shares that fall in value are good for nothing, save for selling at a loss. Wines that do not perform as well as expected financially can always be consumed and enjoyed.
• Performance – there is little doubt that wine has performed very favourably over the past few years. Even in times of macro-economic downturn, wine tends to remain more robust than many other investments. (See my first point about it being finite.)

Right then, what could possibly go wrong with a wine investment?

Some issues

• Fake wine – to be very honest, I had no idea of how much a problem this is until I did a little research. In fact, the problem is very real and is why it’s imperative that you get yourself a good merchant –even the finest have been scammed in the past. Also teach yourself; there are some wonderful books out there about fake wine.
• Unregulated market –  this isn’t the same as buying fake wine – it’s buying the wrong wine at the wrong price. Unscrupulous merchants/wine investment houses have few qualms about selling the wrong wines or the right wines at the wrong prices for investment. Only buy from established merchants and ensure you get the real expertise needed.
• Liquidity – unlike more orthodox investment asset classes, wine is a niche market, so exchanging it for cash can be problematic if time is of the essence.

What is Liv-ex?

Liv-ex or the “London International Vintners Exchange” is the best-known wine trading platform in the world and accepted within the industry as the source of the most reliable pricing data for valuation purposes, with more than 400 global members.  Providing real-time and historic data with 35,000 daily price updates, while processing £28 million worth of bids and offers every day, it’s the global wine investment industry’s leading reference.

A case study – 2000 Ch. Mouton Rothschild, Pauillac

Mouton Rothschild was upgraded to First Growth status in 1973, placing it amongst the illustrious company of Ch. Lafite-Rothschild, Ch. Latour, Ch. Margaux and Ch. Haut-Brion.

The highly successful vintage of 2000 is given further prominence thanks to its millennium status.

Now approaching its prime drinking window, the value has risen steadily throughout the past 10 years, following its initial release price of £2,000.

A quick Google of the price (or if you have Bloomberg, look on Liv-ex) shows a current price of £17,311 giving a very decent return on your initial £2,000.  Going forward, many of these prices will only increase.

In terms of drinking pleasure, with a remaining lifespan of many decades, the finest days of this wine are yet to come.

Conclusion

Wine investment isn’t for everyone and I’m not advocating that it should become a major part of anyone’s portfolio. In fact, if you don’t have an interest in wine, then it’s probably best giving it a wide berth. Of course, there is more than one way to invest in the wine industry; wine stocks, wine funds and even investing in a winery are all alternatives to investing in actual physical wine.

But this is thirsty work, I think I’ll go and have a glass of vino and next time we’ll talk about Hedge funds and how accessible they are to retail investors.